China Will Squeeze Shadow Banking Further Following Lending Binge: Sara Hsu

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Forbes contributor Sara Hsu expects China to continue to put pressure on the shadow banking sector and compel lenders to shift assets back on to balance sheets.

China just posted a record high 2.9 trillion yuan in lending for January, despite Beijing’s ongoing deleverage campaign and efforts to rein in the shadow banking sector.

The figure for January was nearly five times greater than that for the preceding month, when banks extended around 584.4 billion yuan in new loans.

Writing for Forbes, Sara Hsu says that while seasonal factors such as front loading of loans by banks played a key role in the credit surge, Beijing’s ongoing shadow banking crackdown likely played a more important role.

“The increase in new loans reflected, to a great extent, the fact that banks brought loans back onto their balance sheets out of the shadow banking sector as financial regulation intensifies,” writes Hsu.

According to Hsu far tighter regulatory measures, targeting areas including wealth management products, the asset management sector and perceived “implicit guarantees,” ┬áhave proved effective at stifling China’s shadow banking activities.

“Total social financing growth, an indicator of shadow banking, declined in January by 17% year-on-year.

“Some of the riskiest types of funding in the shadow banking sector, wealth management products, have experienced a slowdown in issuance. So far this year, only 229 trust products have been issued, compared to 666 during the same period last year.”

In order to overcome recalcitrance from banks, China’s banking regulator has taken its issuance of penalties and fines to record levels, and is expected to maintain a similar pitch of intensity in 2018.

“This will likely further deflate the shadow banking sector and cause banks to move additional loans onto their balance sheets,” writes Hsu. “Shadow banking products will be squeezed, forced to reduce risks, and some may be allowed to fail if funding streams dry up.”

Hsu said that this crackdown on shadow banking could hamper liquidity amongst small and medium-sized banks given their heavy reliance upon unconventional funding sources.

“Banks and other financial institutions will certainly feel the pain of this process,” writes Hsu. “Without sufficient funding streams, small and medium-sized banks will suffer disproportionately.”

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